As reflected in the following quote from then-FDIC Chairman William M. Isaac
in the FDIC’s 1981 Annual Report, mutual savings banks were becoming a
matter of concern: “During 1981, banks faced both intensified competitive
pressures from unregulated financial intermediaries and unprecedented
economic conditions. These combined to create major problems for a number of
institutions, particularly our mutual savings banks.”

*Includes open bank assistance for First Pennsylvania Bank, N.A.,
with assets of $8 billion. Back
to table

Source: FDIC, 1981
Annual Report and Reports from FDIC Division of Finance and Division of Research
and Statistics.

Notable Events

The FDIC
was involved in a number of activities during the year that
were designed to reduce the regulatory burden on
institutions. Those efforts included participation in the
activities of the Depository Institutions Deregulation
Committee, which was created by Congress in 1980 with a
mandate to oversee the orderly phase out of deposit interest
rate ceilings.

William M. Isaac became the thirteenth chairman of the FDIC
on August 3, 1981. He was appointed to a six-year term on
the FDIC’s Board of Directors in March 1978. Prior to his
appointment to the board, Mr. Isaac served as vice
president, general counsel, and secretary of First Kentucky
National Corporation and its subsidiaries, First National
Bank of Louisville and First Kentucky Trust Company.

Economic/Banking Conditions

The
economy did not bounce back from the weak economic year of
1980, and a recession set in. Gross Domestic Product (GDP)
and employment growth were meager at 2.5 percent and 1
percent, respectively.4-1 Unemployment
continued to rise to 7.6 percent.4-2 Interest rates and
inflation also rose. Signs in real estate markets reflected
the onset of the recession. Home sales (-18.9 percent) and
housing starts (-16.1 percent) again declined from the
previous year, and the commercial vacancy rate increased to
5.4 percent..4-3 The high interest rates, a 13.4 percent
discount rate and a 16.6 percent 30-year mortgage rate,
continued to hurt lending.4-4 Gross loans and leases relative
to total bank assets for the U.S. were down (51.9 percent),
as were total real estate loans at 17.1 percent of assets,
including commercial real estate loans at 4.4 percent of
assets. There was, however, an increase in Commercial and
Industrial (C&I) loans to 10.1 percent of assets, reflecting
the investment in industries around the country that were
expanding despite the national recession.

The Southwest saw an increase in C&I loans, from 13.2
percent of assets in 1980 to 15.1 percent in 1981, as that
region’s two booming industries, oil and agriculture,
continued to reap gains through the first half of the year.
In April, oil prices peaked at $36.95 a barrel and began to
fall. Recessions in oil-consuming nations, reduction in oil
consumption through conservation efforts, and non-OPEC
countries increasing their oil output resulted in pressure
on OPEC’s ability to maintain a fixed price on oil. In
addition, the unity of the cartel deteriorated as members
began to boost their own oil output, selling more than their
OPEC quotas and reducing oil prices in world markets.4-5 The
Southwest experienced a peak in demand for oil rigs.4-6

Agricultural exports peaked at $44 billion and represented a
19 percent share of total exports.4-7 Although
agricultural banks remained profitable, with only 2 percent
of institutions having negative net income, decreasing
demand for American agricultural products caused farm income
to fall short of optimistic projections for the year. That
shortfall signaled an end to the agricultural expansion of
the previous decade and the beginning of the struggle to pay
off farm debt, which had risen to $196.2 billion.4-8

When a downturn in those two industries began in the
Southwest, banks shifted lending to real estate markets. The
value of commercial real estate permits increased by 43
percent in the region despite the drop in commercial real
estate loans to 4.6 percent of assets.4-9 Commercial vacancy
rates in the region’s major cities began to rise.4-10 For the
third year in a row, banks in the region experienced asset
growth rates above the national average, 14.9 percent asset
growth for Southwest banks in 1981 compared to 9.34 percent
for the U.S. banking industry.

In 1981, the Economic Recovery Act was passed. That Act
included generous tax treatment for income producing real
estate that set the stage for future commercial real estate
growth, both in construction and lending. The FDIC, the
Office of the Comptroller of the Currency, and the Federal
Reserve Board set capital requirements for the institutions
that they supervised. At that point, the guidelines did not
apply to multi-national banks.

The recession that began in 1981 arrived at a time when
bankers were willing (and may even have felt forced) to take
additional risks to maintain interest margins in the face of
rising liability costs. The lure of lending to growth
industries had led some banks to excessive loan
concentrations in fragile industries. An oil surplus and
resulting decline in oil prices, for example, surprised many
bankers who had invested heavily in independent oil and gas
development companies that were suddenly no longer viable.

The number of banks on the problem bank list in 1981
remained fairly stable through the year and stood at 223 at
the end of the year. However, in light of the unfavorable
economic conditions at the time, that number was expected to
increase.

Table 4-2 shows an illustration of the number and total
assets of FDIC insured institutions, as well as their
profitability as of the end of 1981.

Table 4.2

Open
Financial Institutions Insured by FDIC
($ in Billions)

Commercial Banks - FDIC
Regulated

Item

1980

1981

Percent
Change

Number

14,434

14,414

-0.14%

Total
Assets

$1,855.7

$2,029.0

9.34%

Return
on Assets

0.79%

0.76%

-3.80%

Return
on Equity

13.68%

13.04%

-4.68%

Savings Banks – FDIC
Regulated

Item

1980

1981

Percent
Change

Number

323

331

2.48%

Total Assets

$152.6

$155.9

2.16%

Return on Assets

-0.17%

-0.94%

-452.94%

Return on Equity

-2.59%

-16.19%

-525.10%

Savings
Associations – FHLBB Regulated

Item

1980

1981

Percent
Change

Number

4,005

3,785

-5.49%

Total Assets

$620.6

$658.5

6.11%

Return on Assets

0.13%

-0.72%

--

Return on Equity

2.45%

-15.59%

--

Percent change is not provided if either the latest period or the
year-ago period contains a negative number.

Source: Reports from FDIC Division of Research and Statistics.

Bank Failures and Assistance to
Open Banks

Seven banks failed in 1981. Two were in Illinois; two were
in Oregon; and one each in Arizona, Colorado, and Georgia. The FDIC paid off
deposits in two cases and arranged purchase and assumption (P&A) transactions in
five cases. There also were three assisted mergers of mutual savings banks.

In November and December of 1981, FDIC assistance under (then) Section 13(e) was
used to accomplish the mergers of three New York City savings banks with total
assets of $4.8 billion. The FDIC’s estimated loss resulting from the assisted
mergers amounted to $772.8 million, or 16 percent of total assets. The three
savings banks involved were Greenwich Savings Bank, Central Savings Bank, and
Union Dime Savings Bank, all in New York City.

The FDIC
was authorized to perform Assisted Mergers under (then) Section 13(e)
of the FDI Act. The FDIC was allowed to take direct action to reduce
or avert a threatened loss to the FDIC and arrange a merger of a
failed or failing insured bank with another insured bank. The FDIC
could make loans secured in whole or in part by assets of an open or
closed bank, or it could purchase any assets or guarantee any other
insured bank against loss by reason of the FDIC’s assuming the
liabilities and purchasing the assets of an open bank.

In 1980, ten
commercial banks failed; three of those were in Kansas. One
bank received open
bank assistance. The ten insured banks that failed
had deposits of $219.9 million. In seven cases involving banks
holding deposits of $202.7 million, the FDIC arranged a P&A
transaction where a healthy bank, either new or existing, purchased
selected
assets of the failed bank and assumed its deposits. In three
bank failures with aggregate deposits of $17.2 million, the
FDIC paid
off depositors
up to the statutory limit ($40,000 prior to March 31, 1980, and
$100,000 after that date).

On April 28, 1980, the FDIC, the Federal Reserve, and the OCC
jointly announced a $500 million open bank assistance package to
assure the
viability and continued operation of First Pennsylvania Bank,
N.A., (First Penn), a subsidiary of First Pennsylvania Corporation,
Philadelphia,
Pennsylvania. First Penn, with assets of $8 billion, was Philadelphia’s
largest bank and the twenty-third largest in the nation. The
assistance to First Penn was in the form of $500 million in five-year
subordinated
notes supplemented by a $1 billion bank line of credit through
access to the Federal Reserve discount window.

A recent estimate of losses per transaction type is shown in
Table 4-3.

Table
4-3

1980
Losses by Transaction Type ($ in Millions)

Transaction
Type

Number of
Transactions

Total Assets

Losses

Losses as a
Percent of Assets

OBA

3

$4,838.6

$772.8

15.97%

P&As

5

56.9

7.9

13.88%

Payoffs

2

51.9

1.1

2.12%

Totals

10

$4,947.4

$781.8

15.80%

Source: Reports from FDIC Division of Research and Statistics.

Payments to Depositors and Other Creditors

The seven banks that failed in 1981 had total deposits of $100.2 million
in 32,930 deposit accounts. Two payoffs represented roughly half of the
failed banks’ aggregate deposits, with 16,883 deposit accounts and $47.9
million in deposits. The three New York City savings banks that received
assistance held 660,231 deposit accounts and $3.9 billion in deposits.

Since the inception of the FDIC in January 1934, until December 31, 1981,
there were 578 insured banks4-11 that closed or were assisted with aggregate
deposits of $10 billion. The FDIC disbursed $6.9 billion to protect
depositors and experienced total losses, including losses expected on assets
in the process of liquidation, of $1 billion through the end of 1981.

In the 312 deposit payoffs since the FDIC began operations, recoveries of
uninsured portions of deposits varied from bank to bank. However, in the
aggregate, nearly 97.2 percent of total deposits in payoffs was paid by the
end of 1981.

Asset
Disposition

At the beginning of 1981, the FDIC had $1.8 billion in failed bank
assets. During the year, the FDIC handled seven bank failures with total
assets of $108.8 million, and assets acquired closely matched assets
liquidated. The FDIC collected a total of $99.7 million. Thus, at the end of
1981, the FDIC held roughly $1.8 billion in failed bank assets, the same
amount with which it began the year.

At the end of 1981, the Division of Liquidation handled a total of 99 active
bank receiverships located in 25 states, the U.S. Virgin Islands, and Puerto
Rico. Of those, four receiverships were handled from the Washington office,
and 95 were handled from the 48 field liquidation offices. Table 4-4 shows
the FDIC’s assets in liquidation and Chart 4-1 shows the asset mix.

Despite the extraordinary expenses
resulting from the merger assistance provided to three large New York
City savings banks, the deposit insurance fund increased during 1981
to a new year-end high of $12.2 billion, an increase of $1.2 billion
or 11.1 percent over 1980. FDIC employment at the end of 1981 totaled
3,394. The Division of Liquidation staff decreased from 460 at the end
of 1980 to 429 at the end of 1981. The Division of Bank Supervision
staff decreased from 2,544 at the end of 1980 to 2,359 at the end of
1981. Chart 4-2 shows the staffing levels for the past three years.

4-11
This figure does not include open bank assistance transactions from
1934-1980. The FDIC did not begin including assistance agreements with the
failures for reporting purposes until 1981. Five assistance agreements,
with total deposits of $6.8 billion, should be included in the overall
totals. Back to
text